Major Policy Issue No. 3: The Debt Bomb

Deficit spending has significant harmful long-term economic effects but neither Kamala Harris nor Donald Trump are talking about it. The growing deficit will lead to more borrowing by the government, higher interest rates, a “crowding out” effect on private debt markets, force cutbacks on entitlement programs, jeopardize the standing of the U.S. dollar, and slow economic growth. It’s a debt bomb that will go off.

Deficits are caused because Congress spends more than what the government takes in. They borrow the shortfall which is what increases federal debt. We, of course, have to pay interest on this growing debt which is the problem. With increasing debt, interest payments take more and more of the government’s budget. 

There is only one cure for growing deficits and that is to cut spending. 

Presently the level of federal debt is about 120% of GDP. GDP is a measure of the total output of the U.S. economy. This is what it looks like (in trillions):

Entitlement programs like Social Security and Medicare are fiscal time bombs. Social Security is running out of money because shortfalls in funding are draining the Social Security trust fund. According to the Congressional Budget Office (CBO), if the problem isn’t fixed, by 2033 there will be a mandatory 23% cut in benefits. Medicare Part A also faces the same problems and will face insolvency by 2031. 

I’m going to throw some numbers at you, so please bear with me because deficits are about numbers.

The CBO’s recent economic forecast for 2025 to 2034 sheds some light on the future impact of growing federal deficits, and, even with very optimistic assumptions, it’s not reassuring. 

Here are the CBO’s projected cumulative totals for the years 2023 to 2034: 

Total Spending: $84,897,000,000

Total Revenues: $62,814,000,000

Total Deficit:     $22,083,000,000

Of those amounts, $64,379,000,000, or 74% of revenue will be spent on mandatory programs like Social Security and Medicare and interest on the debt. That leaves 26% for nondiscretionary items like defense, law enforcement, transportation, national parks, disaster relief, and foreign aid.

The CBO calculates that total federal debt will be $50,664,000,000 by 2034, up from the present amount of $34,831,634,000. There is not a lot holding politicians back, so assume there will be even more spending over the years.

Our presidential candidates are not helping. The Committee For A Responsible Federal Budget (CRFB), a nonpartisan think tank, analyzed the impact of Harris’s and Trump’s tax and spending plans (as of October 7). They gave each candidate a low and high estimate of how much they would increase the deficit from 2026 to 2035 (in trillions): 

Harris:

Low: +$3,500,000,000

High: +$8,000,000,000

Trump: 

Low: +$ 7,500,000,000

High: +$15,000,000,000

These numbers are on top of existing built-in deficit-inducing spending programs.

Numbers in the trillions are difficult to grasp. A few years back a trillion was a stupid number like quadrillions or septillions. But here we are. The reason we have stupid numbers is because of inflation. Inflation is caused mainly by deficit spending. The Treasury borrows money on the financial markets to cover the deficit. Because the amounts financed are so huge, the Fed has to offset the impact of the debt gusher on interest rates by buying some of this debt, mostly by increasing the money supply (money “printing”) to suppress interest rates. Money printing causes inflation and Inflation eventually leads to higher interest rates. Because they’ve been doing this for many years, we have stupid numbers.

What will happen? There is a point where revenues and expenditures reach a point where the debt can’t be sustained. A recent study by the American Enterprise Institute examined the debt limits of 27 OECD countries (Europe and North America). Based on recent historical data they determined the point where debt levels would “impair a country’s ability to manage public spending and deficits.” Such debt levels would be unsustainable which means it would be very difficult to finance or refinance a country’s debt. This is why Greece went bankrupt. For the U.S. that point is when debt is 154% of GDP, only 30 points away from current levels. 

There is a way out: government has to cut spending. But the odds of our politicians going there is unlikely. They can’t balance the budget by raising taxes high enough to offset spending without cratering the economy. They can’t “print” enough money to pay for it without bringing back inflation and stagnation. 

The CBO projects total deficit spending for 2025-2034 to be $22.083 trillion. I think that is optimistic nevertheless by reducing spending each year they could get to the $22T and have a balanced budget by 2035. There are many ways to do this and it is feasible.

Once we get spending under control, then we can come up with strategies for dealing with the debt and enact government spending limits like Switzerland’s “Debt Brake” or Colorado’s Taxpayer’s Bill of Rights.

We can’t stick our collective heads in the sand and ignore this issue. Or by 2034 we’ll be in tears and near bankruptcy.